The euro breached $1.30 as dollars bulls continue to charge full steam ahead. Weaker European economic data helped to trigger waves upon waves of euro selling. German business confidence fell to an 18-month low. The market had actually expected confidence to remain steady with the possibility of some extra optimism following the government’s announcement of corporate tax cuts. However, apparently the stronger euro, high unemployment, weak consumer spending and rising oil prices have made businesses more pessimistic about the current and future outlook for the German economy. With domestic spending being so weak, German companies are looking to Eastern Europe for growth opportunities. In contrast, the Eurozone’s current account surplus increased from EUR 2.8 billion to EUR 3.2 billion. The market has placed less importance on this data since it is for the month of January and indicates that region’s trade benefited from the retracement in the euro during that month. The rebound in February to mid March will probably cause the surplus to narrow again next month. Meanwhile, the dollar has benefited from lower prices, which fell as US crude oil inventories rose to their highest level in 3 years. Although some oil bulls warned about the sharp fall in gasoline inventories, according to a senior oil market analyst at the Energy Department's U.S. Energy Information Administration, inventories are well above average.

USDCHF

Another confirmation of rising inflationary pressure has the dollar rallying once again. Consumer prices in the US grew by the strongest pace in four months, matching the rise in producer prices for the same period. The consumer price index increased 0.4% m/m while the core rate, which excludes the more volatile food and energy components also rose by a more than expected 0.3% m/m. Higher oil prices have increased both gas station receipts and airfares. As we have previously warned, inflation is on the table this week and since we are primarily looking at February data, the risk for inflation is on the upside given the rebound in oil during that month. A similar case should be seen in tomorrow’s German and Tokyo CPI reports. Taking a look at the Fed Fund futures and adjusting for risk premium, the market now expects interest rates to end the year at 3.75%. This means that the market is looking for 4 more rate hikes this year. If there are no gaps between rate hikes, the central bank’s tightening cycle could end as early as September. The dollar is benefiting from a higher interest rate than both Europe and Canada. Having been branded a low yielding currency for the past few years, the Fed’s aggressive tightening measures has the market excited about the dollar’s increasingly positive yield differential. Until the Fed signals that they are done tightening, dollar bulls will continue to ride the rate hike rally.

GBPUSD

The British pound fell 1% or over 150 pips against the US dollar. The pound is among the currencies that are hardest hit by the dollar’s rally despite a more hawkish report from the latest Bank of England meeting. According to the minutes, the number of members supporting a rate hike rose to 2 this month. This means that the vote to keep rates unchanged was 7-2 versus 8-1 in February. Yet there is no immediate need to raise rates in April since most members still felt that there was considerable risk to maintaining the momentum in consumption growth. Last week, retail sales data indicated that the growth in consumer spending slowed considerably between the months of January and February, falling from 0.7% to 0.2%. The CBI industrial trends survey also weakened more than expected today, falling from –10 to –13. The final fourth quarter GDP report was unrevised at 2.9% y/y. After such an explosive move this week, the GBPUSD is near some critical support levels, which may give pound bulls a chance to lick their wounds.

USDJPY

Dollar yen rose for the fifth consecutive trading session as the yen suffered from the weakest rise in Japanese exports in 15 months. Exports grew by a paltry 1.7% while imports rose 11.3% during the month of February. As a result of this differential, the trade surplus shrank 21.7% of an annualized basis. Unfortunately for Japan, who is a major oil importer, the rise in oil prices has boosted the value of imports. This means that it is not increased demand or a healthier economy that is driving the surge in imports, but instead it is the rise in cost of a basic necessity. For an economy that is struggling to recover and deal with an aging population, the higher cost for an input that is required for most households will only make Japan’s notorious savers even more thrifty. The latest data also indicates that foreign demand has been quite disappointing and certainly far from sufficient to cover some of the oil induced rise in imports.

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